Memeorandum

September 12, 2011

Ponzi Schemes

Stanley Kurtz provides a history of the comparison of Social Security to a Ponzi scheme.

Writing in USA Today, Gov. Rick Perry says he intends to be "honest" with the American people:

Americans must come together and agree to address the problems so today's beneficiaries and tomorrow's retirees really can count on Social Security for the long haul.

We must have a frank, honest national conversation about fixing Social Security to protect benefits for those at or near retirement while keeping faith with younger generations, who are being asked to pay.

Team Romney would rather demagogue the issue with a flyer asking "How can we trust anyone who wants to kill Social Security?".

Hmm. That is a bit of an Eleventh Commandment violation. The normal justification for wild, exaggerated attacks is that the candidate can expect worse in the general election. I agree that Obama will probably have hi sback to the wall and be willing to say anything, but...

Apparently back in 2007 Obama was carving out new territory for himself (and rousing Paul Krugman's ire) by calling for long term solutions to the Social Security crisis. He might have a bit of a problem executing the full flip-flop come 2012.

And as an amusing aside, Chris Matthews recently got some attention by echoing Perry's Ponzi plaint. However, let's give Mr. Matthews props for intelluctual consistency - back when he was thrilling to Obama, Obama's comments on the need to fix Social Security prompted this Hardball exchange with the late Tim Russert (by way of Krugman):

Mr. Russert: “Everyone knows Social Security, as it’s constructed, is not going to be in the same place it’s going to be for the next generation, Democrats, Republicans, liberals, conservatives.”

Mr. Matthews: “It’s a bad Ponzi scheme, at this point.”

Mr. Russert: “Yes.”

It was a Ponzi scheme for Matthews when Obama wanted to fix it, and I guess it still is.

And going further back in time, Bill Clinton and Al Gore discovered that Social Security was in crisis in the late 90's when the alternative was Republican tax cuts. "Save Social Security First" and "Keep it in a lockbox" are the catchphrases of that era.

Today, New York Stock Exchange has invoked Rule 48, which provides the exchange with the ability to suspend the requirement to disseminate price indications and obtain floor-official approval prior to the opening when extremely high market-wide volatility could cause floor-wide delays in opening of securities on the exchange.

apparently, over here (http://www.ssa.gov/history/ponzi.htm), ssa considers itself not a ponzi scheme for the sole reason that the requirement to perpetuate the system don't meet the definition of geometric progression, but it's hard to see how despite the much stingier benefits (than a ponzi scheme), compacted timelines (the beneficiaries "at the top" are dying off), and the fact that the social security monies aren't truly invested in assets that the program would be legal in the private arena. ss could only truly considered a pipeline if the benefits paid out were bound by law only to the inbound monies.

The irony could.not.possibly.be.any.damn.funnier; Just as Sgt. Obama had the not so lonely unemployed club band huddled around him to tell America to "PASS THIS BILL", literally that very minute Bank of America released a statement it is sacking 30,000. Because Banana republic is so 2010, we are now officially an Onion republic.

I have seen Legions of posters at JOM who insist they don't want to kill SS, so the hypocrisy is near-Univerisal. That is to say; if it IS a Ponzi
as those self-same poaters indicate, why wouldn't you want to kill it?

Might help if we all were to stipulate that because it is run by a gigantic governmental leviathan with the power to compel participation and taxation as opposed to a lone immigrant swindler with the power to do neither that there are some important differences between a classic Ponzi scheme and SS.
But it would also be useful to stipulate that the considerable similarities are not nearly so superficial nor unimportant as SS and its defenders would like us to believe.
With those points out of the way it's a lot easier to get beyond the "is so, is not" uselessness and explore just how broken [or not] it is.
My own view is that while some quite significant reductions in projected benefits will put it on a much more actuarially sound footing it will still be an extremely expensive, inefficient and fundamentally flawed defined benefit system and almost anything else would be preferable to it.

To me, what distinguishes it from a Ponzi scheme is the fact that contributors are not deceived about what is being done with their money, and payees aren't deceived as to where their payments are coming from. What is far more troublesome to me is that it is compulsory.

But IT'S A PONZI SCHEME!

I'm glad Perry brought this up so early. There is plenty of time for the electorate to be treated to an informed discussion of the matter (ignoring what Nancy Pelosi is going to say), for the first time ever.

OK, it's becoming clear that Perry is on his way to the GOP nomination unless a late entrant comes and derails the Perry express. So, to the JOM Texas contingent, I have a question: is there something you think we non-Texans should know now about Perry, as opposed to knowing in Sept. of 2012? Perry has impressed me on the campaign trail, and of the current candidates, I think he is the one most likely to defeat Obama. I also think that Perry's explicit focusing on entitlement reform highlights an issue that has to be addressed quickly by our next POTUS. However, Perry, unlike Romney or Palin (who I know isn't in the race yet), didn't run last time, so he really hasn't been vetted. Do the Texas JOMers think he will survive the vetting (which will be a lot tougher vetting than MSM's rumpswabbing of Obama in 2008).

Nothing would make me happier than to dance on the grave of the SS abomination.

Exactly; I've said for a long time that I'd be willing to forgo anything that I paid in as long as they'd come clean and label it a welfare payment for people who didn't independently plan, or have the wherewithal to do so, for retirement.

Politics aint beanbag in Texas, ( remember where the fake but accurate files came from ) and after the races that have been run by Perry here, anything that would be disqualifying would have come out I am quite certain.

Lets also remember that after Rev Jeremiah Wright there is also a very high bar for what could possibly be disqualifying.

Rick Perry will stand in the middle of the ring and trade punches with the current lightweight if he is of such a mind. Only Zero will be floating jabs while Perry will counterpunch with crosses and uppercuts meant to hurt not just score points. A knockout is indeed possible with Perry in the ring.

If Obama's henchmen start going after nit picky problems in Perry's background, I don't think the Perry gang will take it lying down. And Perry impresses me as the kind of candidate that will give much better than he gets. He won't be reluctant to use ammunition like Kurtz and Cashill have provided.

Perry is not likely to replicate the "my friends" kid gloves style of his predecessor either.

Jim, the link works perfectly for me, but here (at the risk of TM being sued for copyright violation) is a copy of the full post from Bubbax, a Texas Tea Partier who posts as The Big Picture Forum on Delphi:

From: BUBBAXX Jun-29 10:49 am
To: JERRY4969 (28 of 129)

36984.28 in reply to 36984.25

Howdy Jerry. I'll give you a little about Perry, I bet Rose can add more...
Perry is known down here as Governor Goodhair, sometimes as Governor Zoolander.
He used to be a Dem, campaigned for Gore...then he realized that Dems had a tough time getting elected here so he became a RINO, er republican. Alright, I'll give him that, maybe he had a true epiphany and found his heart was more on the right.
And he does 'ok', I'd give him passing marks but not 'B's, maybe low 'C's at his high water mark. He has learned how to be a politician, he triangulates, he will wish then wash, and he is not above letting strange dollars fall into his hand which just happens to be lying there palm open, face up.
He'll sometimes choose political solutions over the voice of the people.

He tried to foist the Trans-Texas Corridor off on us, even though We the People howled like banshees. He was using eminent domain to displace people for that durned Mexican-Canada hiway and kept trying to make it happen even as we held town hall after town hall screaming at him to stop the insanity.

He tried to force a vaccine on us-Gardisil?- against the wishes of Parents and health professionals.

He has done nothing to seal our border, and yes I know that's a Federal responsibility. But when the Federal government defaults on it's responsibility the duty falls back on the States and People don't it - Texas Sheriffs have the duty to enforce Law in their counties, as well as Texas Department of Public Safety. Perry has done little to nothing to prevent the illegal notion of 'sanctuary cities' for instance.

He signed into law a bill which grants the authority to forcibly remove people from their homes via 'mandatory evacuations'. A friend of Perry's, who is also a friend of ours, is a State Representative from a county to my south. I complained to him, told him to tell Rick that many of us would not evacuate during storms even knowing that NOW the cops do indeed have the power to arrest you- as they threatened me with during Ike - if you don't go. Texans hate that law Jerry, those of us who did evacuate from Rita know exactly why we'll never place our Families at the mercy of a broken society again. I told him to tell Rick that that law was gonna get a cop shot because I would not be arrested like that especially with a storm coming in...and he told me Rick didn't think the law would actually be used to force us, but it was for isolated situations where they needed to move people.
I do not like that sort of authoritarian thinking.

Perry would be orders of magnitude better than any Dem, but he slithers a bit himself. He is a politician more than he is a conservative, I think. But he would be better for America than a Dem, even if he would not be my first choice.
I demand an honest government, or am trying to demand an honest government. Perry probably isn't as honest as Bachmann or Paul, say, and I want honest government.
But I could settle for Perry, he isn't a McCain or Gingrich.

Texas politics isn't bean bags. But we didn't know about Bush's DWI. Ann Richards would have loved to have known about that. I think if there was something really nasty out there, Kay Bailey would have used it (or had it leaked by her people) she being too much of a lady to use it herself and all. There are probably things you don't know yet that people in Texas do. I figure Mitt, Paul and Bachmann will start leaking them out soon. Right now they are using his book "Fed Up" against him. He, on the other hand, is not backing down from what he said in the book.

Right now the system isn't really a welfare program, except to the extent that high earners have more taken out for Medicare than others do. Other than that, your benefits are tied directly to your contributions.

My guess is that reform is going to involve at least some sort of means-testing, which moves it further in the direction of welfare.

It would be courageous (and efficacious to his supporters) if Perry would admit, publicly what you have stated openly.

Well, if individual mandates are upheld by the SC, you may have you wish. What better way to save "Social Security" than by getting away from the clearly broken and soon to be bankrupt "pay as you go" system, and transforming it into FDR's vision of a system of private annuities.

--It would be courageous (and efficacious to his supporters) if Perry
would admit, publicly what you have stated openly.--

Perhaps he doesn't believe what I do.
He may believe as he quite plainly stated in USA Today, today, that it can and should be reformed. Not much of a gotcha there.

--I've seen some numbers indicating that a change in indexing and a slight increase in the retirement age would make it solvent long-term.--

Tacking five extra years of work onto a workers remaining 13 or 14 years doesn't seem too slight to me. And the bending of the indexing curve may be slight per year but cumulatively it is not.

--Seems to me it's damn near impossible to transition this system to a private account system. At least, I would have no idea how to do it.--

If Chile can do it the US can. Practically it's not that hard; there are many fairly simple methods already proposed.
Politically it will doom the left to the wilderness so there is the problem; scared lunatics fighting for their political survival.

"ben" gleefully invites us to express our opinions, no doubt hoping he can find a three-word phrase to make us sound scary to the undecided voters. The MSM does the same thing.

Ben, when "liberals" like you want to skewer your political opposition, you never quote the whole conversation or the whole speech. OTOH, when we want to skewer "liberals," we quote you in context and at length, which the MSM won't do.

Social Security is not a Ponzi scheme. There are lots of articles on the Internet explaining why Social Security is not a Ponzi scheme. To believe that Social Security is a Ponzi scheme, you would have to be stupid, uninformed, malicious, or all three.

Furthermore, Social Security does not have any financial problems that could not be fixed in ways that do not involve destroying or eviscerating the program. Raising the cap on the payroll tax, eliminating the oil industry subsidy, cutting defense spending in half, or even by 30 or 40%, and raising taxes on the wealthy and the super-wealthy are just a few that come to mind right away.

Rick Perry's goal -- and that of every other Republican -- is to end Social Security for everyone under 55. Actually, if they could, they would eliminate the program entirely, but that is still politically impossible.

I realize the likelihood you will allow this comment to stay in your Comments section is somewhere between nil and zero, but at least I know YOU will see it, Tom Maguire, and it felt damn good writing it, because it's the truth and I'm sick and tired of seeing cruelty, callousness, and indifference masquerade as "fiscal responsibility."

OK, thanks all for the update on Perry. It appears that he is a crafty and tough infighter who on occasion goes in for too much state involvement (see Chubby's link) but is serious about entitlement reform. It also appears as if he will not start apologizing to MSM for taking on their cherished prog nostrums. I saw in a poll reported at Insty today that his support among seniors seems to be holding up. I do hope that if there is a drunk driving type matter in his life, it comes up now. That almost cost GWB the election. I think if it came out now, Perry would survive it.

I am setting myself up to eat crow, but I really think Perry is going to wrap this thing up well before the convention unless Palin or Christie enter the race, and even if they do enter the race, the Perry momentum may be impossible to stop now.

I have seen Legions of posters at JOM who insist they don't want to kill SS, so the hypocrisy is near-Univerisal. That is to say; if it IS a Ponzi as those self-same poaters indicate, why wouldn't you want to kill it?

For the same reason that we don't just say "Ha ha joke's on you!" when the Madoff scheme was discovered. Part of eliminating the SS Ponzi will hve to be finding a way to make the victims, if not whole, at least better off than they would be.

Iggy, the slight adjustment I was recalling was not Ryan's five-year one. But if you compare today's life expectancy with what it was at the time of enactment, it's altogether reasonable.

Right, Kathy--just spent the taxpayers' money on a welfare scheme instead of defense. That'll go over big. Are you aware that the highest earners in the US bear a larger share of the income tax relative to their share of income than those in any of the other 23 nations of the OECD?

Well, quite a few of us are sick and tired of seeing hard working peoples' money taken by force, then given to the politically connected wealthy, and politically convenient "vicitm class" du jure masquerade as compassion.

For example, the majority of your list of "solutions":

eliminating the oil industry subsidy, cutting defense spending in half, or even by 30 or 40%, and raising taxes on the wealthy and the super-wealthy are just a few that come to mind

are essentially an admission that Social Securty can't fund itself any longer, and therefore is a Ponzi scheme.

Ross Perot, for all his spectacular nuttiness, used to ask "If we weren't already doin' it, would we start now?"

I don't think SS passes that test. A congress today might very well enact a compulsory retirement program pursuant to its taxing power, but it wouldn't look remotely like this one. But as the Europeans have shown us, and as Americans are beginning to recognize, it's far easier to start an entitlement program than it is to end it.

kathy, per wikipedia - a Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.

also, your brilliant solution/s to this problem seem to be that we need to further mix the income tax revenue with the payroll tax revenue, which even leftist economists think is a bad idea (we should be seeking to separate ss revenues from other revenues).

and one thing further, though Ranger has already noted it, the admission of the need for adjusting the terms of the ss system implies that this system is a scheme. the only thing unchanging, it seems, is a very narrow definition of Ponzi scheme.

Puttsi's Scheme..American Jobs Act "details", including the wonderful goodies promised each state as soon as the bill is passed. No indication of where the imaginary money will come from. but why quibble when Santa's Comin' To Town.

Except that Romney's attack on this point is neither wild nor exaggerated, since Perry has said Social Security is unconstitutional. That's not someone who wants to 'fix' it; that's someone who believes the entire program is illegal.

BTW, this looks like both good primary and good general ellection framing. Everyone knows Social Security is in trouble financially. Once Perry establishes himself as the "speak truth to power" candidate in the primary, he can use it to hammer Obama on all of his deceptions from the 2008 campaign and his term in Office.

I can just see Perry running an add saying 'I promise, if I send Americans to war, I will call it a war, not a "kinetic military action."' And another one that says 'I won't claim I'm cutting $4 trillion when I'm actually raising spending $7 trillion.'

Well, in prior years SS had a yearly surplus that Congress and Admin (no matter the party) plundered instead of "locking it up" in the trust. No more surplus this time around. Also, in Bammy's job's bill there is a payroll tax holiday, so next year may be negative cash-flow. That and the continued lack of growth in new participants. But you have to play and pay unlike a Ponzi which is voluntary. IOW's its worse than a Ponzi.

Seems to me it's damn near impossible to transition this system to a private account system. At least, I would have no idea how to do it.

Well, to some extent the answer is "stop putting money into fake bonds and start putting it into real bonds." I don't have time to work out the details, but we right now have got more cash coming from FICA than we're expending. Pay current expenditures out of revenue from FICA; use the excess to buy real investments and retire the funny-money in the "trust fund".

Since social security doesn't pay a very good return anyway, it should be possible to improve the returns and use compounding to buy off more of the fake bonds.

Establish that people have actual ownership of their investment bonds -- none of the current "I don't care what you paid, we decide what you get."

That's not someone who wants to 'fix' it; that's someone who believes the entire program is illegal.

Try being honest with yourself. It is entirely logical to believe that a system, when enacted, was unconstitutional (it wasn't) while at the same time recognizing that after several generations it would be unwise, unfair and impossible to end it. And no one but Nancy Pelosi believes it doesn't need to be fixed.

"I realize the likelihood you will allow this comment to stay in your Comments section is somewhere between nil and zero, but at least I know YOU will see it, Tom Maguire, and it felt damn good writing it, because it's the truth and I'm sick and tired of seeing cruelty, callousness, and indifference masquerade as "fiscal responsibility.""

Kathy;

I have never had a comment deleted here. Feel free to return and
comment. JOM is largely hostile and territorial, but there are a few
honest conservatives who are not fearful, of what they feel, are counter-intuitive ideas.

((a Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors))

can social security pay out its current obligations on its own, right now, without the help of fresh money coming in from contributors who are not yet receiving benefits?

Kathy, if social security is not a Ponzi scheme, it's none the less a scheme through which contributions from later participants are used to pay unrealizable returns to participants who joined earlier, and depending on always being able to bring in enough new suckers participants to maintain the fiction of high returns.

Chubby, ss money isn't invested in real assets per se so at the very least the system needs to be amortized and separated from the general funds. ss can pay out its obligations today, but then so can a Ponzi scheme for a time. my point was that based on the definition in my post, ss seems more like a Ponzi scheme than not.

--Iggy, the slight adjustment I was recalling was not Ryan's five-year one. But if you compare today's life expectancy with what it was at the time of enactment, it's altogether reasonable.--

DoT,

A quick look here reveals that since 1940 the life expectancy after 65 has only gone up around 4 years. The huge increase in life expectancy has come about mostly through the elimination of childhood mortality not life extension.

***************
If Kathy comes back I'm going to tell a joke I heard about a rabbi, a priest and a polack. Very irreverent.

And also the clearest explanatin of why the question you started with is a red herring. Any Ponzi scheme can, at any time, be transformed into a legit investment if you can re-set the participants expectations of return, start making investments that will make that return and a little more so the original victims can be made whole, and stay out of jail in the mean time.

In the case of social security, the actual fraud was largely committed by people who proved Keynes' prediction -- in the long run, they died.

Meanwhile at the White House, they scratch their heads and wonder why unemployment doesn't go down:

Texas energy company Luminant announced on Monday new burdensome Environmental Protection Agency regulations are forcing it to close several facilities, which will result in about 500 job losses. The company will be idling — stopping the usage of — two energy generating units. It will also cease extracting lignite from three different Texas mines.Texas energy company Luminant announced on Monday new burdensome Environmental Protection Agency regulations are forcing it to close several facilities, which will result in about 500 job losses. The company will be idling — stopping the usage of — two energy generating units. It will also cease extracting lignite from three different Texas mines.

"In the case of social security, the actual fraud was largely committed by people who proved Keynes' prediction"

Originally, the average life expectancy was around 55, but it was intended as a 'safety net' to protect widows and orphans from the early demise of the bread-winner, and to provide some support for those too old to work any longer. I fail to see how that is 'fraud' because it was never intended to replace retirement savings. The problem is, most people do not save for retirement, and it therefore becomes the only means of support. Many cannot be blamed for failing to save 20% while trying to provide room and board to themselves and dependents.

It seems that the implosion of the Soviet system only served to remove the “reality check” from the preachers of Marxists/Critical Theory who dominate the American university, and the result was a generational army for Obama.

Social Security is not a ponzi scheme, folks. Please stop with this. There is a payroll tax -- which is not invested, put into accounts for anyone, or, more importantly, legally available to anyone. With the Ponzis of the world, there was always a legal right to withdraw and purported assets to support the scheme.

Social Security is a government pension based on your work history and compensation through the years. Future congresses can change the formula without notice or kill the program.

Words have meaning. When politicians amp the language up to 11 a la Rush for every single thing, it encourages people to ignore the things they say. Which may be the point.

I find this one particularly amusing. Many lefties apparently actually believe oil and gas companies get more money from the government than they pay in, which is delusional. In fact, they pay an effective tax rate of approximately 41%.

Another article of faith amongst the left is that "oil subsidies" are huge and would bankroll entitlement spending. In fact, even if you go with their rather ridiculous calculations of eliminating all deductions written into the tax code for that industry, it amounts to a mere 4.5 Billion per annum, while Social Security was in the red for 37 Billion last year alone.